Tuesday, 17 March 2009

RC JOURNAL: Schwundgeld

NOTE: Here's some fun thinking about local currencies (a topic that may become increasingly relevant in the coming years). Hope you find it of use.

Regional or local currencies, or scrip, are designed to catalyze and grow local economies. Typically, they gain steam when a regional/local economic depression is exacerbated by national/global deflation (asset collapse and monetary hoarding) -- as we are experiencing today. These currencies take a variety of forms, from "hour of work" equivalents, food/energy stockpile backed currencies, to depreciating currencies (called Schwundgeld in Germay, arguably the most popular).

Schwundgeld is a form of currency that actively discourages hoarding/savings through aggressive rates of depreciation -- as in, notes issued at the start of January depreciate by 2% per month, meaning it is worth 98% of face value in February and 96% in March. This rate of depreciation incentivizes immediate use, or demand, in depressed economies. It also minimizes societal stratification due to financial accumulation, discourages hoarding, and minimizes non-productive behavior. The arguments against Schwundgeld and regional currencies in general, as outlined in "Regional currencies in Germany - local competition for the Euro" by Gerhard Rosl and commissioned by the German Bundesbank, fall into the following categories:

Users of the system are not indifferent to immediate vs. delayed demand. While this does stimulate demand in the short term, it limits growth of the currency and its ultimate stimulative effect.

Profits from the system are misused.

In short, according to this analysis, depreciating currencies don't work as well as the theoretical models of national fiat currencies in stimulating economic growth. Of course, the theoretical models in question don't reflect our current experience, since we are now in depression/deflationary economic environment with accelerating hoarding/income stratification. In light of this development, the response to the critique is that potentially sub-optimal solutions are often better than no solution at all (as in Churchill's famous dictum: "democracy is the worst form of government, except for all those other forms that have been tried from time to time"). Specific responses:

Local currencies ensure that minimal local needs can be met in the absence of a functioning or available global system. In this respect, it minimizes or hedges against catastrophic downside risk and reduces uncertainty. This is an aspect that the national system fails to address. National systems are indifferent to local malfunction.

While depreciating currencies don't enable rapid monetary growth and accelerating stimulation, they are very effective at dampening excesses (everything from stratification, hoarding, and non-productive behavior). Currencies of this type aren't designed as a store of value over the long term. Alternatives exist for that, and savings are accomplished either through conversion to national currencies, assets, or fungible commodities. The system does what it is designed to do.

Cui bono? The most telling critique is the issue of, "how is the excesses generated by administering the system spent?" This can be addressed by limiting administration costs to a fixed percentage of the system and allocating the remainder to public platforms -- everything from maintaining an electrical microgrid (in order to eliminate/lower transaction costs) to baseline production of food/energy/etc.

How does this apply to warfare?

If you are working on COIN or stability operations and you aren't thinking about the potential uses of local currencies/scrip, you aren't even in the game. Connecting devastated local economies to a chaotic and hyper competitive global economy does not auto-magically occur, it needs to be built/grown organically and insulated against rapid reversals. Local currencies could play a significant or central role in mitigating and restarting economic activity following:

Disconnection of local economies due to COIN operations (ink spots) post instability.

Economic development in areas where national corruption/mismanagement make services highly uncertain.

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RC JOURNAL: Schwundgeld

NOTE: Here's some fun thinking about local currencies (a topic that may become increasingly relevant in the coming years). Hope you find it of use.

Regional or local currencies, or scrip, are designed to catalyze and grow local economies. Typically, they gain steam when a regional/local economic depression is exacerbated by national/global deflation (asset collapse and monetary hoarding) -- as we are experiencing today. These currencies take a variety of forms, from "hour of work" equivalents, food/energy stockpile backed currencies, to depreciating currencies (called Schwundgeld in Germay, arguably the most popular).

Schwundgeld is a form of currency that actively discourages hoarding/savings through aggressive rates of depreciation -- as in, notes issued at the start of January depreciate by 2% per month, meaning it is worth 98% of face value in February and 96% in March. This rate of depreciation incentivizes immediate use, or demand, in depressed economies. It also minimizes societal stratification due to financial accumulation, discourages hoarding, and minimizes non-productive behavior. The arguments against Schwundgeld and regional currencies in general, as outlined in "Regional currencies in Germany - local competition for the Euro" by Gerhard Rosl and commissioned by the German Bundesbank, fall into the following categories:

Users of the system are not indifferent to immediate vs. delayed demand. While this does stimulate demand in the short term, it limits growth of the currency and its ultimate stimulative effect.

Profits from the system are misused.

In short, according to this analysis, depreciating currencies don't work as well as the theoretical models of national fiat currencies in stimulating economic growth. Of course, the theoretical models in question don't reflect our current experience, since we are now in depression/deflationary economic environment with accelerating hoarding/income stratification. In light of this development, the response to the critique is that potentially sub-optimal solutions are often better than no solution at all (as in Churchill's famous dictum: "democracy is the worst form of government, except for all those other forms that have been tried from time to time"). Specific responses:

Local currencies ensure that minimal local needs can be met in the absence of a functioning or available global system. In this respect, it minimizes or hedges against catastrophic downside risk and reduces uncertainty. This is an aspect that the national system fails to address. National systems are indifferent to local malfunction.

While depreciating currencies don't enable rapid monetary growth and accelerating stimulation, they are very effective at dampening excesses (everything from stratification, hoarding, and non-productive behavior). Currencies of this type aren't designed as a store of value over the long term. Alternatives exist for that, and savings are accomplished either through conversion to national currencies, assets, or fungible commodities. The system does what it is designed to do.

Cui bono? The most telling critique is the issue of, "how is the excesses generated by administering the system spent?" This can be addressed by limiting administration costs to a fixed percentage of the system and allocating the remainder to public platforms -- everything from maintaining an electrical microgrid (in order to eliminate/lower transaction costs) to baseline production of food/energy/etc.

How does this apply to warfare?

If you are working on COIN or stability operations and you aren't thinking about the potential uses of local currencies/scrip, you aren't even in the game. Connecting devastated local economies to a chaotic and hyper competitive global economy does not auto-magically occur, it needs to be built/grown organically and insulated against rapid reversals. Local currencies could play a significant or central role in mitigating and restarting economic activity following:

Disconnection of local economies due to COIN operations (ink spots) post instability.

Economic development in areas where national corruption/mismanagement make services highly uncertain.

On Brave New War

G. Gordon Liddy Show (radio)...this is a seminal book in the truest sense of the term.. way ahead of the curve... go out and buy it right now -- G. Gordon Liddy

City JournalRobb has written an important book that every policymaker should read -- Glenn Reynolds (Instapundit)

Small Wars JournalWithout reservation Brave New War is for professional students of irregular warfare and for any citizen who wants to understand emerging trends and the dark potential of 4GW -- Frank Hoffman

Scripps Howard News ServiceA brilliant new book published by terrorism expert John Robb, titled "Brave New War," hit stores last month with virtually no fanfare. It deserves both significant attention and vigorous debate... - Thomas P.M. Barnett

Chet Richards DNIJohn has produced an important book that should help jar the United States and other legacy states out of their Cold War mindset. You can read it in a couple of hours – so you should read it twice...

Washington Times / UPIRobb correctly finds the antidote to 4GW not in Soviet-style state structures such as the Department of Homeland Security, but in decentralization -- William Lind (the father of 4th generation warfare).

Robert PatersonHaving painted a crystal clear picture of how a war of networks is playing out, he comes to an astonishing conclusion that I hope he fills out in his next book.

The Daily DishJohn Robb of Global Guerrillas has written the most important book of the year, Brave New War. - Daily Dish (The Atlantic)

Simulated LaughterWell-written. Brave New War reads more like an action novel than a ponderous policy book. - Adam Elkus

FutureJackedGo buy a copy of this book. Now. If you are low on cash, skip a few lunches and save up the cash. It is worth it. - Michael Flagg

ZenPunditThe second audience is composed of everyone else. Brave New War is simply going to blow them away. - Mark Safranski

Haft of the SpearThere aren’t a lot of books that make me recall a 12-year-old self aching for the next issue of The Invincible Iron Man to hit the shelves. Well done.
- Michael Tanji

Ed ConeHis book posits an Army of Davids -- with the traditional nation state in the role of Goliath. - Ed Cone (Ziff Davis)

Shloky.comThis is the first real text on next generation warfare designed for the general population and it sets the bar high for following acts. It is smart, it is a short read, and it will change your thinking. - Shlok Vaidya

Politics in the ZerosI suggest this is something Lefties need to start thinking about now, as that decentralized world is coming. - Bob Morris